BoE says higher rates are 'likely ahead', MPC now 'a hostage to geopolitics'

Matthew Ryan, CFA Ebury

The Bank of England put markets on notice today, effectively signalling that higher rates are in the offing, even if the data is not demanding tighter policy just yet. The bank said it has yet to see evidence of second-round effects from the spike in energy prices, but it's clear the risks are building - and it warned hikes may be needed if the conflict drags on, which the MPC now considers likely.

The vote remained unchanged at 6-3, though several members who backed a hold flagged that the case for a hawkish pivot is building the longer this energy shock persists - a clear signal that higher rates are likely ahead. The upgrades to both the growth and inflation forecasts tell the same story, reflecting both the ongoing war and the surprising resilience of UK activity data.

Today's announcement leaves near-term tightening firmly on the table, and markets continue to fully price in a hike later this year. Yet sterling sold off on the news anyway, with investors underwhelmed by the lack of a clearer steer toward the November meeting.

The MPC has confirmed that it remains effectively a hostage to geopolitics, and until an Iran peace deal materialises, every meeting from here should be treated as live.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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